IPP Working Paper 1
Institutional Capital Theory
Abstract
This paper develops Institutional Capital Theory, a framework for analysing a bounded class of durable institutional capabilities as productive capital. From four axioms, that capital yields a flow of productive services, that institutional capabilities differ in durability, that expenditure becomes capability only under identifiable conditions, and that the service yield of a given stock varies with learning, interoperability and complementarity, the paper derives a central result. The Institutional Capital Theorem holds that institutional outcomes are determined by the services delivered by an institutional capital stock, and that this stock is the accumulated history of investment actually converted into durable assets, net of decay. Two jurisdictions with identical institutional expenditure, identical formal rules and identical measured governance may therefore diverge persistently in institutional performance, and the divergence is fully attributable to three separately observable quantities: conversion efficiency, depreciation and the productivity with which the stock is deployed.
The claim is narrower than the proposition that institutions matter, and it is falsifiable in a single way: if measures of institutional capital add no explanatory or predictive power beyond governance, institutional quality and state capacity, the framework should be rejected. The paper specifies the underlying stock-flow model, which distinguishes gross institutional expenditure from durable asset formation and separates the quantity of the stock from the productivity of its deployment; distinguishes foundational, sectoral and adaptive institutional capital; proposes an Institutional Capital Test and a measurement architecture; and sets out three decisive tests that would establish or defeat the theory. Digital public infrastructure provides the principal application, because its productive value depends not only on technology but also on legal authority, organisational routines, interoperability, human capability, maintenance, cybersecurity and public legitimacy.
A summary of this paper appears on the blog: The hidden source of state performance
Cite this paper
Institutional Public Policy Press (2026). Institutional Capital Theory (IPP Working Paper 1). Institutional Public Policy Press.
Institutional Public Policy Press. Institutional Capital Theory. IPP Working Paper 1. New York: Institutional Public Policy Press, 2026.
Show BibTeX
@techreport{wp-01-institutional-capital-theory2026,
author = {Institutional Public Policy Press},
title = {Institutional Capital Theory},
institution = {Institutional Public Policy Press},
type = {IPP Working Paper},
number = {1},
address = {New York},
year = {2026}
}